While each varies somewhat in its approach, all of these measures would allow states to apply the same sales tax rules to Internet and out-of-state sales as they do to Main Street retailers and other small businesses.
The Supreme Court’s 1992 decision hinged in part on the complexity of requiring retailers to navigate 45 state and 7,600 local sales tax systems across the nation. Yet modern software, which allows for easy sales tax collection across multiple jurisdictions, has rendered this objection mostly obsolete.
The three pending bills not only level the playing field but also advance a fundamental principle of pro-growth tax reform. By allowing states to finally expand their tax base to all retail sales within their borders, they would create an opportunity for governors and state legislatures to consider lower sales tax rates.
Economists note that relying on sales tax rates of 9 percent or 10 percent from a narrowing base of taxable goods distorts consumer behavior and puts pressure on states to raise revenues from other sources such as income or property taxes.
This distorted policy also gives rational consumers a reason to abandon community-based retailers in favor of remote sellers. Reasonable people can debate the ideal combination of tax rates and tax base, but in the meantime Main Street retailers are caught in the crossfire and jobs are at stake.
Supporters of the status quo claim that online retailers should be exempt from sales taxes because they do not benefit from local schools, police or fire departments, but this is a red herring. Sales taxes are not a business tax, they are a consumption tax. They are intended to raise revenues off a broad base, not shift consumption from one retailer to another.
As the super committee looks for ways to not only reduce our deficit but lift economic growth, it should consider making a down payment on fundamental tax reform by closing arbitrary loopholes and enabling government at all levels to broaden the tax base and hopefully lower tax rates.
Tax laws should be free of distortions that capriciously reward some businesses at the expense of others. If Congress wants to make a statement against taxes, perhaps they should consider a prohibition on all sales taxes. Otherwise, it’s time to fix this broken system so that retailers can compete against each other fairly.
Matthew Shay is president and CEO of the National Retail Federation.